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Topic: OZRK - Bank of the Ozarks (Read 43395 times)

Hi all - My first post here on COBF. Figured I'd jump right into a battleground stock. Everything that has been said about sound banking principles is correct: deposit costs matter, low defaults are important, liquidity is key, construction loans have a bad history, etc. etc. But I do think we ought to consider the context.

1. Before the GFC and today are two totally different scenarios. Anyone who has bought a home recently or sought a business loan probably can attest to this. Yet, watching for CRE/Resi bubbles has become kind of a national sport. Probably because that's what happened LAST time. I believe Peter Lynch called it the 'penultimate preparedness', preparing for the last crisis (more popularly, fighting the last battle). A 'normal' recession (unlike GFC) doesn't cause mass defaults on any and all CRE loans and run on banks (though, understandably, that memory is fresh from 08-09). Elevated defaults? Sure. But run-on-the-bank-triggering defaults? I doubt it.

2. OZRK was quite opportunistic in buying up banks AFTER the GFC. This was actually a good time to buy banks. So growth through acquisitions, generally disliked in the banking industry (correctly, IMO), was not a problem here. For those who take an interest in FDIC-loss share accounting, you'll notice that OZRK accounted for each failed bank acquisition conservatively and the disclosure was amazing so you could actually see it.

3. In whole-bank acquisitions, they mostly issued stock when their stock was valued higher than what they acquired. This is what Singleton did when TDY was valued much higher in the 60s than target companies. It was all disclosed and well executed so investors could follow along. From a capital allocation standpoint, it makes sense. It was opportunistic and when the premium multiple faded, they stopped acquiring. So management wasn't chasing growth. Now that OZK stock is lower, Gleason is talking about ways to buy it back (potentially). Again, opportunistic, and shows management sensibility.

4. OZRK didn't just come out well through the GFC, but also survived the 80s and the 90s banking crises. To think that Gleason remained disciplined from 1979 to 2009 and then lost his mind seems a stretch.

5. As to Holdco-merger, this is not uncommon. Why spend money and be under Fed regulation if you don't have to be. Some of the FRB regs are ridiculous and I don't see any problem in avoiding them legally if they can. Other banks without federal charter are large banks such as First Republic, Signature, and small banks such as Farmers And Merchants Bank of Long Beach, a "value investor" favorite. (put that in quotes because of the whole thing about all investing being value investing, etc.). Also, just because they steered clear of the Fed does not mean there's only state regulation. The FDIC is still a regulator and is not a pushover.

6. I have also read the short-thesis comment about showing low GFC losses by acquiring banks (i.e. acquiring loans faster than you are losing money to show low NCO ratios). But, if we take out purchased loans and then recalculate the ratios, OZRK's NCOs were still better than industry. Also, as noted above, the marks on acquired loans were conservative.

7. Last call, they talked about slowing down a little in CRE because they were seeing some not-so-good-lending in the space. So it seems management isn't totally blind to the possibility of a slow-down eventually.

8. Finally, to be short at this level means the stock really has to fall to 5x earnings or zero. Maybe if CRE problems do come, their numbers could take a hit. Perhaps the stock could take a hit. But to bet on a zero seems extreme to me.

9. Now being on COBF, I suppose I must talk about Buffett. If you go back to the 1969-71 reports, you'll see they owned a bank called Illinois National Bank. Readers on this forum ought to be very familiar with the situation there. Time deposits were over 50% of the mix. Efficiency ratio was very low and ROAs were high at 2% v/s 0.5% industry back then. Not that there's a comparison but just to show that not ALL of these are headed for the trash heap.

I was a little unsure about making my first post on a battleground stock. But it did seem a very interesting name so figured I'd chime in. Nice to meet everyone. Hoping to hear some feedback. Thanks!

Hi all - My first post here on COBF. Figured I'd jump right into a battleground stock. Everything that has been said about sound banking principles is correct: deposit costs matter, low defaults are important, liquidity is key, construction loans have a bad history, etc. etc. But I do think we ought to consider the context.

1. Before the GFC and today are two totally different scenarios. Anyone who has bought a home recently or sought a business loan probably can attest to this. Yet, watching for CRE/Resi bubbles has become kind of a national sport. Probably because that's what happened LAST time. I believe Peter Lynch called it the 'penultimate preparedness', preparing for the last crisis (more popularly, fighting the last battle). A 'normal' recession (unlike GFC) doesn't cause mass defaults on any and all CRE loans and run on banks (though, understandably, that memory is fresh from 08-09). Elevated defaults? Sure. But run-on-the-bank-triggering defaults? I doubt it.

2. OZRK was quite opportunistic in buying up banks AFTER the GFC. This was actually a good time to buy banks. So growth through acquisitions, generally disliked in the banking industry (correctly, IMO), was not a problem here. For those who take an interest in FDIC-loss share accounting, you'll notice that OZRK accounted for each failed bank acquisition conservatively and the disclosure was amazing so you could actually see it.

3. In whole-bank acquisitions, they mostly issued stock when their stock was valued higher than what they acquired. This is what Singleton did when TDY was valued much higher in the 60s than target companies. It was all disclosed and well executed so investors could follow along. From a capital allocation standpoint, it makes sense. It was opportunistic and when the premium multiple faded, they stopped acquiring. So management wasn't chasing growth. Now that OZK stock is lower, Gleason is talking about ways to buy it back (potentially). Again, opportunistic, and shows management sensibility.

4. OZRK didn't just come out well through the GFC, but also survived the 80s and the 90s banking crises. To think that Gleason remained disciplined from 1979 to 2009 and then lost his mind seems a stretch.

5. As to Holdco-merger, this is not uncommon. Why spend money and be under Fed regulation if you don't have to be. Some of the FRB regs are ridiculous and I don't see any problem in avoiding them legally if they can. Other banks without federal charter are large banks such as First Republic, Signature, and small banks such as Farmers And Merchants Bank of Long Beach, a "value investor" favorite. (put that in quotes because of the whole thing about all investing being value investing, etc.). Also, just because they steered clear of the Fed does not mean there's only state regulation. The FDIC is still a regulator and is not a pushover.

6. I have also read the short-thesis comment about showing low GFC losses by acquiring banks (i.e. acquiring loans faster than you are losing money to show low NCO ratios). But, if we take out purchased loans and then recalculate the ratios, OZRK's NCOs were still better than industry. Also, as noted above, the marks on acquired loans were conservative.

7. Last call, they talked about slowing down a little in CRE because they were seeing some not-so-good-lending in the space. So it seems management isn't totally blind to the possibility of a slow-down eventually.

8. Finally, to be short at this level means the stock really has to fall to 5x earnings or zero. Maybe if CRE problems do come, their numbers could take a hit. Perhaps the stock could take a hit. But to bet on a zero seems extreme to me.

9. Now being on COBF, I suppose I must talk about Buffett. If you go back to the 1969-71 reports, you'll see they owned a bank called Illinois National Bank. Readers on this forum ought to be very familiar with the situation there. Time deposits were over 50% of the mix. Efficiency ratio was very low and ROAs were high at 2% v/s 0.5% industry back then. Not that there's a comparison but just to show that not ALL of these are headed for the trash heap.

I was a little unsure about making my first post on a battleground stock. But it did seem a very interesting name so figured I'd chime in. Nice to meet everyone. Hoping to hear some feedback. Thanks!

The webcasts wouldn’t start for me, but I think something else must have been said there, and the answers weren’t very satisfactory, since the stock is down 2% today.

The stock move appears unrelated. Looks like it was down even before the event started. I felt the answer was pretty good about how they work around doing recourse loans. And the fact that it's not something new but something they've done for a long time now and are experienced in structuring it properly.

here's the crux of the debate on this board addressed by George Gleason here. On a side note - I also took a look at Corus Bank's 10ks from 2005-2009 and read through the Treasury auditor's report post-mortem. I don't want to detail my findings here but the Corus of 2006 is very different from the Ozarks of today. The Corus analogy is interesting but it's really a reach, in my opinion. I'm not even a banks analyst but I can see some glaring flags (with perfect hindsight of course) from Corus's financial reports in 2005 and 2006.

Matthew John Keating Barclays Bank PLC, Research Division – Director & Senior AnalystYes. I had a question around competitive advantage. And so, I actually did some research on where you guys fit in within the construction lending market. And what I discovered is that you basically fulfill a need for nonrecourse financing, where the large money center as well, et cetera, don't necessarily provide that financing. And the mezz lenders are effectively too expensive. And there's kind of 2 lenders in the market, you and another that satisfy that need. So I just want to talk about that, if that's true and then as a source of competitive advantage. And then the other question I had was around the concentration of risk in deals. So the deals you're doing today are much larger than you were doing x years ago, right? And so when you're doing a shopping center in Florida and it's $300 million or plus, just talk a little bit how you've managed the chunkier aspects of that relative to your total capital position.

George G. Gleason Bank OZK – Chairman & CEOYes. I'd be happy to do so. I've been Chairman and CEO for 39 years, and the bank has historically, from the very beginning, done full legal limit loans to customers we like, on projects we like. And I will tell you, in my 39-plus year history, we've been profitable continuously, so we've never lost money. So that willingness to take significant positions in a single credit and put our full legal loan limit to work on a single credit is nothing new. And we've managed that over 39 years where it's never hurt us. So I think that's important to understand. The second thing I would tell you is your question is based on an improper premise that were taking more concentrated positions than we ever have in the past. And I will give you an example. Going into the last economic downturn, the Great Recession, we had a number of loans on our books that were full legal limit loans to those customers. The largest loan that we've got on the books today is less than half of our legal loan limit. So while that loan today maybe 6 or 7x the size loan that we made 10 years ago, the reality is that, it's a fraction of the percentage of our capital account that it was. So if you look at our loans, the capital were less concentrated today than we were 10 years ago and were less concentrated, I think, over 1 year ago and 2 years ago and 3 years ago. But we do make large loans. And that is based on the fact that we believe those are the best quality transactions and the best quality customers. Now a lot of our loans are nonrecourse as to principal. But on every loan that we have been involves construction, we have a completion guarantee, wherein the sponsor or the owner of the sponsor, some upper-tier entity is giving us a guarantee that the project will be completed on time, on budget, lean-free, essentially. And as a result of that in the 15-year history of Real Estate Specialties Group, we have not had a single loan, not one loan, wherein we've gotten at the end of the project and we've not had the project completed with the funds that remained in the loan. So that requires a very effective completion guarantee structure, where your sponsor's going to cover cost overruns and do it immediately. It requires a very effective asset management servicing structure, where you identify issues that will create budget problems early on in the process, where you still got the leverage to require the sponsor to fix that. And it requires sponsors of high quality and projects of high quality. So we've been very successful in totally avoiding that risk. We also have, in every loan that we do that doesn't have a full principal recourse, we have a carve-out guarantee, our multiple carve-out guarantees. And those guarantees are much more rigorous than the typical banks' carve-out guarantees. And it basically limits our sponsors from putting the entity in bankruptcy or filing an act of responsive plating in bad faith and a foreclosure action. The carve-out guarantee is basically intended to control sponsor bad behavior. They're sometimes referred to as bad boy guarantees, because if you have a problem credit, you don't want the sponsor to be able to delay you or diminish the value of your collateral and can then commit ways to steal deposits, allow environmental contamination, not pay the utilities, not pay the insurance...

Why do you think it is that other Banks, with better funding bases don't want to be in that business?

what do you mean by "better funding bases" and which banks are you referring to?

I can't speak for them but in my view, as a noveau non-bank analyst here is my take. As a category, if you're a big box bank that relies on credit committees and box checking and form filling and lazy credit analysis and regulators telling you what limits you need to pass stress tests - you got burned badly during the great recession. All the BofA's of the world with the "better funding bases" showed how well their credit process works during a crisis. The only reason it wasn't worse is because their >1T in asset size provides a natural diversification. Forget about stress tests- contrast their charge off rates with OZK under actual real world stress - The great recession. And then grade their credit process. You got particularly burned if you were in construction lending because as a category they had some of the worst charge-off ratios and default rates during the great recession, so it's natural to "as a rule" stay away.

But this is like asking "why do you think fidelity or Blackrock doesn't own 10% Fiat Chrysler (assuming it a great investment which i think it is)?" because they lost money on auto stocks...who cares? In my view, they have a subpar investment process with risk committees and investment committees which basically leads to index hugging. The big asset managers have rules about concentration (no position larger than 2%-3%, no sector concentration larger than xyz%) just like the wells fargo and BofA's of the world have a subpar lending process with layers of bureaucracy and credit committees that is driven by box checking exercises. They're all just so large and diversified that they rely on that to keep them out of trouble instead of actually doing good work.

This is not a knock on Fidelity/BofA/Blackrock analysts. There's plenty of really talented, smart individuals at these firms and you have to be to get a job there. But some that i've spoken with will tell you their process hinders them from delivering great results. It's the same idea.

The punchline is for me as it relates to OZK - if they've got a credit process and business judgment driven by a superb banker based on common sense and has proven to work through 40 years of credit cycles, who cares why others aren't doing it? The others - on average - aren't very good anyway. Gleason isn't plain "lucky" either. Bob Wilmers was a phenomenal banker too and M&T's charge off rates were comically low during the crisis. So was Ron Hermance at Hudson City Bank (may they both rest in peace), which M&T eventually bought. In other words, good ol' fashioned credit analysis and common sense works fine. The trouble is most banks don't use common sense.

I mean go ahead and believe that. History says everyone who plays in this market, in this way, goes bust. The pay off profile of a loan is very different from an equity. As a value equity guy, so long as you can tolerate the vol ( which Fido et Al. often can't) you live for another day. Unfortunately loans are selling puts. If they don't cash flow, you have to take marks against your capital.

The idea that all of these Banks avoid a high risk adjusted roa strategy because they are dumb or lazy - it's kind of crazy. Look at how much market share these guys have taken in new entrant markets - they don't know the players how can the have an underwriting advantage? This game had been seen before, is just history rhyming.